Tag: options trading

I am sure that you’ve heard Costco Wholesale (COST) announced a special dividend of $7.00 per share, plus an additional increase of $0.05 to its regular quarterly dividend. The special $7.00 one time cash payment will be paid on May 26th, to those who are on record as owning shares on May 8th, 2017. What do we expect to happen when a special dividend is paid? Well, we expect the COST share price to fall -$7.00 to reflect the $7.00 one time payment. So, is this a Free Money investment if I were to buy an Out of the Money or At-the Money put option? Since the stock is going to fall the put would have to gain in price, correct? Even though I did not receive the dividend, my put would still gain and I would have a nice, juicy, leveraged profit…right? Not quite. In fact, not at all….

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Selling naked puts, either cash secured or on margin, is a means for investors to: Generate monthly or weekly income on bullish stocks Potentially get into stocks at a discounted price To enter a naked put trade you will will Sell to Open a put option against a specific stock or ETF. An option premium is received up front and the investor now has the obligation to buy shares of that security at the strike price, if the underlying is trading below the strike price at expiration. The investor will generally need to have the capital on hold in their account to fulfill the obligation of the sold put. This is a neutral to bullish strategy. You should only sell puts against stocks they would not mind owning in their trading account. It is generally not a good idea to sell puts that have a very high premium due to…

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Each quarter we get the barrage of earnings announcements and go through all the earnings figures of each company. Earnings announcements can cause wide swings in stock prices. Positive earnings events can send a stock into a gap up in price and conversely negative or disappointing earnings can result in a stock price sell off. The question then can be asked, “Is there a way to take advantage of these swings in stock price as a result of an earnings announcement?” The advent of weekly options has made it easier to play earnings announcements. Options have a time value depending on how much time there is to expiration of the option. By using very short time frames for option speculation, this time value can be made very small. Since we know when earnings will be announced and the price reaction to the announcement happens over a very short time, weekly…

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You have probably heard about using put options to lock in a gain on a stock that has moved up in price. This is also one of the ways investors can lock in gains on a long call position. We received an email from a PowerOptions customer with the following details: “Bought AUY Jan 20 2017, $1.50 CALL @ $1.19 a long time ago. Current price of the CALL is $2.85. I don’t own the stock itself. How do I lock in the profit but stay with the position, as I think that gold has a bright future? The only idea that crossed my mind is very simplistic: buy a protective PUT. For example, pay $1.41 for AUY Oct 21 2016 $5.50 PUT.” Let’s break down this position: Yamana Gold Inc. (AUY) currently at $4.21

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Straddle/Strangle Example Many of you know, I’ve been trading for over 50 years. Over that time, I’ve come to recognize market conditions that coincide with trading opportunities. Here are some of the conditions that led me to one of my latest trades… and an example trade you might love! The last two weeks of October is when most companies announce third quarter earnings. This particular October, following several years of bullish market conditions, stocks appear to be topping and consolidating. This topping process seems to be accompanied with increased volatility. In this mix of market environments, stocks with earnings disappointments are getting hit particularly hard while other stocks having positive surprises and large upward moves. This seemed to be an opportunity to speculate with an option strategy that might take advantage of these wide swings in stock price due to surprise earnings announcements. The long strangle is an option strategy…

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The Conservative Barbell Strategy: We recently reviewed a book written by Nassim Taleb called “The Black Swan”. In it, the author suggests an approach for investing called the Barbell Strategy. The approach is based on the concern that unexpected market events can happen with devastating impact to our portfolios. The Black Swan is about such events that are generally unknown, unpredictable, and cannot be planned against to mitigate losses. Because they are unpredictable they cannot be avoided, we need a way to protect assets as best we can against these unforeseen events. The Barbell strategy uses the two extremes: Ultra conservative positions at one end and highly leveraged, speculative positions at the other end of the risk range. The strategy advocates having most assets in very safe securities like treasury bills or conservative options and a small portion in high risk – high reward securities like long put or call…

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PowerOptions has added many great tools for options traders over the years. Not all of them perfectly fit into the “strategy” navigation theme that we use. As a result, some of the best tools we offer have been obscured from obvious use. Our latest update to the site has been to gather up all of these tools and put them in one place for easy access. – The SIGNATURE TOOLS tab… What might you find there?